Air NZ’s Luxon trumpets record result in global airline market where many struggle

Air New Zealand chief executive Christopher Luxon says the national carrier’s record result stacks up against any airline in the world, and was underpinned by strong demand, cost efficiencies and cheaper fuel.

Net profit rose to $327 million in the 12 months ending June 30, from $263 million a year earlier, the Auckland-based company said in a statement. The result included a $29 million loss on Air New Zealand’s 26 percent stake in Virgin Australia. The shares fell 2.3 percent to $2.59, and have gained 7.3 percent this year.

Pretax normalised earnings were $496 million, up 49 percent on the previous year. The company said that was in line with its June guidance for pretax normalised earnings of between $520 million and $530 million, which was excluding losses from Virgin Australia.  Operating revenue rose 6 percent to $4.93 billion with passenger sales growth of 6.8 percent to $4.1 billion.

Luxon said profitable growth had been at the heart of the company’s restructuring over the past four years, which had seen an increase in profitability each year.

“We’ve just had an investment grade rating last week. Of 300 commercial airlines in the world only 30 covered their cost of capital and only seven had an investment grade rating. Air New Zealand is among the top three airlines in the world,” Luxon said.

Lower fuel prices added a $120 million net benefit to the company during the financial year and Luxon expects ongoing cheaper fuel prices to provide a $300 million benefit in the year ahead under the airline’s new hedging, although there will be some currency drag on that.

The volatile kiwi dollar had a $31 million negative impact on the airline in the 2015 financial year and is expected to have an $80 million drag on profit in the coming year

Luxon said he wasn’t too concerned about the impact of the current slowdown in China’s economic growth, which has caused jitters on the world’s stock markets, saying the airline is “fit to compete” with costs down a further 4.5 percent this year following its investment in new aircraft.

“I’m not as bent out of shape by macro economic conditions as others,” he said.

The company has declared a fully imputed dividend of 9.5 cents per share, an increase of 73 percent on the prior year, taking the total dividend for the year to 16 cents per share.

Chairman Tony Carter said the airline’s strategic initiatives in the past three years had positioned it well to take advantage of market dynamics. Given the current known operating environment, Carter said the airline expected to achieve significant earnings growth in the coming year.  Virgin Australia is also expected to become profitable this financial year.

Air New Zealand is facing some headwinds ahead with its stranglehold on the domestic regional market ended following Jetstar’s announcement it will enter the market later this year.

The airline has said it won’t be undercut on prices on the regional route and earlier this month cut lead-in fares by 11 to 40 percent on most routes ahead of Jetstar’s announcement next month of which regional destinations it will fly to from December.

Luxon wouldn’t say whether there is expected to be a hit on operating earnings but said the airline was ready to compete given its strong cash flow and financial position. He expected it would still be able to add an additional 8 percent capacity into the domestic market profitably this year while offering more than two million domestic fares at less than $100.

He said talk about the threatened domestic competition had been a “bit overblown”.

“It’s not just Jetstar with its four aircraft, there are a lot of little airlines adding capacity. We have better aircraft at a lower cost and are not pressured on lower pricing,” he said.

Luxon said there was good demand for the two new routes starting in December – Buenos Aires in Argentina and Houston in Texas – with the airline already considering adding capacity. There was good opportunity for the airline to persuade Australians to use Auckland as a gateway hub to North and South America, particularly for those living outside of Sydney, he said.

Air New Zealand’s loyalty programme, Airpoints, has continued to grow with around 1.9 million members, up almost 17 percent on the previous year. Australia remained the biggest overseas membership base with growth exceeding 20 percent during the year.

Luxon said there was work to do in promoting New Zealand as a destination in Argentina after a survey showed people ranked it as the 48th country they would want to visit.

“I don’t doubt we can do it,” he said with the airline working closely with Tourism New Zealand to invest more marketing of New Zealand in Argentina.

Luxon said the two big challenges ahead in the next year was making sure the airline executes well on its marketing in Argentina and that it capitalises on a big opportunity in digital technology and innovation to make it easier for customers to transact with the airline.

The airline has spent $1 billion on capital expenditure in the past year and has a further $2 6 billion budgeted for new aircraft in the next four years.

Air New Zealand’s result will benefit staff through a Company Performance Bonus which will see 8,000 of its 11,000 staff who are not on other incentive programmes, receive payments of up to $1,400.

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